Elon Musk’s xAI Offers Higher Interest to Attract Investors: What’s Behind the Big Debt Deal for Grok?
- Graziano Stefanelli
- 1 day ago
- 4 min read
Elon Musk’s startup xAI has changed its $5 billion fundraising deal, offering even more generous terms to investors after early interest wasn’t as strong as expected.
The decision highlights both the huge potential and the real risks that come with betting big on cutting-edge AI.
What Changed in xAI’s Deal?
xAI, which is the company building the Grok chatbot, went out to investors in early June looking to raise $5 billion. This is a very large amount, even by technology industry standards. At first, xAI offered to pay a high interest rate, hoping that would be enough to convince people to invest. But when not enough investors signed up, xAI and its main bank, Morgan Stanley, made the deal more attractive by raising the interest rate even higher on every part of the package.
Here’s what changed:
The $3 billion in senior bonds, originally paying 12% interest each year, now pays 12.5%.
The $1 billion “Term Loan A” also went up to 12.5% interest.
The $1 billion “Term Loan B” now pays a floating rate (SOFR plus 7.25%), but also sells at a deeper discount, so lenders will actually make even more in total return.
On top of that, xAI gave investors three extra days to decide, extending the deadline from Tuesday to Friday, June 20. This shows the company really wants to fill up its order book and bring in as much money as possible.
Why Did xAI Need to Offer More?
Even for a famous name like Elon Musk, raising this much money is a challenge. While Musk is known for his work at Tesla and SpaceX, xAI is still a new company. Most investors prefer to put their money into companies that are older, more established, or at least have more predictable cash flow.
Let's see the main reasons why xAI had to raise the rates...
xAI is a new and unproven company: It doesn’t have public financial records, and its main product—Grok chatbot—has only just started to bring in revenue.
Huge monthly spending: xAI is burning through about $1.3 billion every month. That money mostly goes toward building massive data centers filled with expensive GPUs (special chips used for training AI), and to fund research into Grok-3, the next version of their AI model.
The debt isn’t backed by a strong bank guarantee: Morgan Stanley is only acting as a broker, not promising to buy the debt themselves. If investors don’t want to buy in, the deal can be made smaller or even canceled entirely.
Collateral is hard to value: The debt is backed by both computer hardware and intellectual property (ideas, software, and patents), but it’s unclear how much money this collateral would bring in if things go badly.
Where Will xAI Spend the Money?
xAI plans to use the $5 billion to scale up its technology and computing power. The money will mostly be spent on two big projects...
Building “Superclusters” of AI Computers: xAI is working on two huge data centers in Memphis and Reno. These will be packed with more than 100,000 Nvidia H100 GPUs by the end of 2026 if all goes to plan. These chips are the “engines” behind AI, and having so many of them could let xAI build much larger and smarter AI models, possibly competing with the likes of OpenAI (which makes ChatGPT) and Google (behind Gemini).
Developing Grok-3: Part of the money will go toward training and improving Grok-3, the next generation of xAI’s chatbot. The goal is for Grok-3 to become as strong or even stronger than the current leaders in AI.
In the background, xAI is also trying to raise $4.3 billion more by selling shares in the company. If both the debt and equity sales succeed, xAI will have enough money to cover about a year of its current spending.
Is the Deal a Good Opportunity for Investors?
By increasing the interest rates, xAI is hoping to attract investors who are searching for high returns, even if it means taking on more risk. At 12.5% interest, the deal pays much more than most “junk bonds” or loans from new tech companies, which usually offer between 7% and 11%.
But investors have to think carefully about the risks.
Success is not guaranteed: Grok-2 (the previous version) made big improvements, but still didn’t become the top chatbot. Investors are taking a bet that Grok-3 will truly stand out and make money.
The AI arms race is expensive: The biggest tech companies—like Google, OpenAI, Microsoft, and Meta—are spending $30–40 billion each year on AI research and hardware. Even a $5 billion raise from xAI is small by comparison, so it may not be enough to win the race unless they spend it wisely.
No sure exit: xAI’s management has mentioned the idea of taking the company public with an IPO within two years. However, heavy borrowing and fierce competition could make this much harder.
What’s Elon Musk’s Bigger Plan?
For Elon Musk, xAI isn’t just another tech company. He’s hinted at ways to connect xAI’s AI technology with his other companies. For example, he has talked about using Grok in Tesla’s self-driving dashboards, but there is no official deal in place yet. This means that while there could be extra opportunities, the people lending money to xAI do not have any direct claim on profits from Tesla or Musk’s other businesses.
If Musk succeeds in building a leading AI model and making it popular, it could be a big win for everyone involved, especially if xAI can refinance its debt at lower rates or sell shares to the public at a high price. If not, the company could struggle to pay back investors.
What Does This Mean for the Future of AI Investing?
The xAI debt offering is a sign of just how much money and risk is flowing into artificial intelligence right now. On one side, it shows that investors are willing to fund bold new projects if the potential rewards are high enough. On the other, it’s a reminder that even big names like Elon Musk have to work hard to convince people to bet on expensive, unproven ideas.
In the end, it’s a classic high-risk, high-reward situation: Will xAI’s extra-high interest rate be enough to make investors comfortable with the risks? Or will some decide the potential downsides are just too great? The answer will depend on both xAI’s next moves and the wider race to build the most powerful AI.
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